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Leading Dragon Phenomenon:
New Opportunities for Catch-up
in Low-Income Countries
VANDANA CHANDRA, JUSTIN YIFU LIN, AND YAN WANG∗
Modern economic development is accompanied by the structural transformation
from an agrarian to an industrial economy. Since the 18th century, all countries
that industrialized successfully have followed their comparative advantages and
leveraged the latecomer advantage, including emerging market economies such
as the People’s Republic of China (PRC), India, and Indonesia. The current
view is that Chinese dominance in manufacturing hinders poor countries from
developing similar industries. We argue that rising labor cost is causing the
PRC to graduate from labor-intensive to more capital-intensive and technologyintensive industries. This will result in the relocation of low-skill manufacturing
jobs to other low-wage countries. This process, which we call the “leading dragon
phenomenon,” offers an unprecedented opportunity to low-income countries.
Such economies can seize this opportunity by attracting the rising outward
foreign direct investment flowing from Brazil, the PRC, India, and Indonesia
into the manufacturing sectors. All low-income countries can compete for the
jobs spillover from the PRC and other emerging economies, but the winner must
implement credible economic development strategies that are consistent with its
comparative advantage.
Keywords: structural transformation, Asia, Africa, People’s Republic of China,
flying geese
JEL codes: B10, O10, O14, O25
I. Introduction
Many developing economies have tried to catch up with industrialized countries but only a handful of countries, mostly in East Asia, have succeeded. Entering
into the 21st century, Brazil, the People’s Republic of China (PRC), India, Indonesia,
and a number of other large developing countries achieved dynamic growth and
emerged as the drivers of global growth in a new multipolar world.
∗
Vandana Chandra ([email protected]) is Senior Economist at the World Bank, Justin Yifu Lin (Justinlin@
ccer.pku.cn) is founding Director and Professor of the China Centre for Economic Research at Peking University,
and Yan Wang ([email protected]) is Visiting Professor at George Washington University. This paper was
led by Justin Yifu Lin during his tenure as the Senior Vice President and Chief Economist of the World Bank. The
authors are grateful to Shahrokh Fardoust, Zia Qureshi, Changyong Rhee, Maria Socorro Gochoco-Bautista, and two
anonymous referees for their helpful comments and Kwang Park and Jian Zhang for their input. The views expressed
in this paper are those of the authors and do not necessarily reflect those of the institutions they are affiliated with.
Asian Development Review, vol. 30, no. 1, pp. 52–84
C 2013 Asian Development Bank
and Asian Development Bank Institute
LEADING DRAGON PHENOMENON 53
Lin (2010) and Lin and Monga (2011) show that a developing country can
achieve dynamic growth and catch up by exploiting the latecomer advantage and
developing industries that are aligned with its comparative advantage. In this paper,
we build on this theme and use historical and comparative perspectives to show
that because of similarity in the comparative advantage of low-income countries,
the dynamic emerging economies, when they upgrade their industrial sectors, will
create a huge space for low-income countries. In contrast to the conventional thinking that the PRC’s dominance in manufacturing export dooms poor countries to
economic backwardness, we argue that its growth spiral may in fact be a boon. As
the PRC upgrades its labor-intensive industries and cedes market shares, millions of
labor-intensive jobs will be relocated to low-wage countries and can accelerate their
industrialization. This process, which we call the “leading dragon phenomenon,”
offers an unprecedented opportunity to low-income countries. To the skeptics, we
point to current trends in South–South foreign direct investment (FDI) flows as
drivers of industrialization in low-income countries. If other emerging market countries such as Brazil, India, and Indonesia follow the PRC’s growth trajectory, they
will create even more labor-intensive jobs in low-income countries.
Section II motivates the analysis by reviewing the evidence on structural
transformation and its role in industrialization in the world. Section III examines the
experiences of the Industrial Revolution, the post-World War (WW) II period, and
the more recent East Asian successes in catching up. Section IV first discusses the
failures to catch-up in various countries that followed protectionist strategies. It then
analyzes the PRC’s meteoric rise in the context of its “comparative advantage following” strategy. Section V investigates the impact of the PRC’s rising labor costs on its
employment structure and the industrial upgrading and job relocation currently being
facilitated through outward foreign direct investment (OFDI). Section VI concludes.
II. Structural Transformation and Catch-up
A.
Catch-up in a Multipolar World
Sustained and rapid income growth is a modern phenomenon that appeared
only after the Industrial Revolution in the 18th century. Before that time, for a long
period, almost all countries in the world had agrarian economies and were poor
relative to today. The income gap among countries was very small. The richest
country’s per capita income was only about five times greater than the poorest
country’s per capita income (Maddison 2010). The Industrial Revolution led to
accelerated growth in the Western European countries, the United States (US), and
other western offshoots, but most other countries failed to do so. As a consequence,
there has been great divergence in income levels between developed and developing
countries and between developing countries with dynamic growth and those trapped
54 ASIAN DEVELOPMENT REVIEW
Figure 1. Emergence of Multipolar World in the 21st Century
Contribuon to World GDP Growth
100%
80%
60%
40%
20%
0%
1980-1984
1985-89
1990-94
1995-1999
2000-2004
2005-2011
-20%
High income
People's Republic of China
Developing excl BRIC
India
Brazil
Russian Federaon
DCs ex-BRICS = developing countries excluding Brazil, the PRC, India, and Russian Federation; HICs = highly
industrialized countries; PRC = People’s Republic of China.
Source: World Bank. 2012. World Development Indicators 2012. Washington, DC.
in low-income or middle-income status (Lin 2011). By the end of the 20th century,
the gap had significantly widened, with per capita income of industrialized highincome countries at more than 50 times that of low-income economies (Maddison
2010). Among the set of developing countries, only a handful were successful in
transforming their aspirations for catching up into reality. Among them were Japan
and the East Asian tigers (Hong Kong, China; the Republic of Korea; Singapore;
and Taipei,China).
The growth poles in the past were all high-income countries such as Germany,
Japan, the United Kingdom (UK), and the US. In the 1980s and 1990s, among
the top five contributors to global growth, all but the PRC were G7 industrial
countries. By 2009, all except the US were emerging economies. The replacement
of G7 by G20 as the primary global forum since the eruption of the global crisis
in 2008 underscores the emergence of a multipolar world. The sheer size of the
large emerging economies combined with their dynamic and sustained growth has
elevated Brazil, the PRC, India, and the Russian Federation (known as BRICs) to
become the largest contributors to economic growth in the world (Figure 1). During
2006–2010, almost 45% of global GDP growth was generated in the BRICs. The
era of a multipolar world seems to have been firmly established.
B.
Structural Transformation and Catch-up
The path to prosperity in the developed countries was marked by a process of structural transformation as reflected in employment and value-added of
LEADING DRAGON PHENOMENON 55
primary, secondary, and tertiary industries. Long-term economic trends from the
pre-industrial stage of development in a large number of developed countries confirm that at the end of each episode of catch-up, the fast grower’s economy had
a structure closer to that of a developed country as opposed to a low-income one
(Syrquin 1988, p. 206; Chenery 1979, xvi; Abramowitz 1983, 85; Lin 2009, 2010,
2011, and 2012b).
Simon Kuznets sought to understand and document long-run transformation
through a series of stylized facts, though he was reluctant to offer a theory of
development. His empirical studies identified four features of modern economic
growth.1 According to the first Kuznets fact, structural transformation occurs when
the share of the nonagricultural sectors in an economy increases. A reconstruction
of national accounts from a variety of sources for western countries shows that such
a transformation raised overall productivity and increased the returns to workers and
capital. From 1800–1849 to 1951–1960, for example, agriculture as a share of gross
domestic product (GDP) declined from 30% to only 5% in the UK and from 20% to
4% in the US. The share of industry inclusive of manufacturing meanwhile increased
from 23% to 56% in the UK and from 33% to 43% in the US (Kuznets 1966). Second,
this sectoral shift is mirrored in the structure of employment. Third, the population
is redistributed from rural to urban areas. And fourth, the capital–labor ratio in the
nonagricultural sectors of the economy rises.
History points to the critical role of industrialization as an engine of sustained
growth in the long term. Since productivity growth is associated with technological
change and industrial upgrading, it can be said that continuous structural change in
technologies and industries is the main feature of modern economic growth (Kuznets
1966, Maddison 2010). In Western Europe, the annual per capita income growth
before the 18th century was about 0.05%, accelerated to about 1% in the 18th and
19th centuries, and reached 2% in the 20th century. The required time for doubling
per capita income thus fell from 1,400 years before the 18th century to 70 years in
the 18th and 19th century and further to 35 years in the 20th century (Maddison
2010).
History also demonstrates that in the first stage of catch-up, manufacturing
was instrumental in the transfer of new technologies to nonmanufacturing sectors of the economy. Manufacturing has contributed to the modernization of the
agricultural and mining sectors, which provide raw materials through backward
linkages, and spawning services through forward linkages. In addition, manufacturing can serve as an indirect source of demand and thus spur catch-up. Because
there is a tight nexus with the services sector, technological progress and growth
in manufacturing lead to a larger demand for services, propelling overall economic
growth.
1
Kuznets (1966, 1971).
56 ASIAN DEVELOPMENT REVIEW
Figure 2. Manufacturing and Income Growth, 1993–2007—Industrialization
as Growth Engine
Source: World Bank. 2011. World Development Indicators 2011. Washington, DC.
Except for a few oil-exporting countries, no country has achieved highincome status without dynamic industrial upgrading. In general, a change in GDP
per capita is strongly and positively correlated with growth in value-added in the
manufacturing sector (Figure 2). If countries rich in natural resources or land countries have achieved a middle-income status without a large manufacturing sector,
they rarely succeeded in sustaining growth. More importantly, growth in the resources sector does not create much employment.
III. Industrialization, The Flying Geese Pattern, and Catch-up
in a Historical Perspective
History shows that following comparative advantage to tap the latecomer
advantage is the best way for developing countries to start and sustain a dynamic
growth path for diversification and industrialization (Lin 2009, Lin and Monga
2011). The spread of industrialization in Western Europe in the 19th century, rapid
catch-up in the post WWII period, and the East Asian miracle starting in the 1980s
are all reminiscent of the flying geese pattern. In this section, we provide evidence
on this assertion.
In the 1930s, economists researching “catch-up growth models” argued that
catch-up was not random. Kuznets and Akamatsu explored the conditions under
which the Industrial Revolution occurred in the UK and how it spread only to those
countries that had sufficient accumulation of capital and skilled labor, among other
LEADING DRAGON PHENOMENON 57
conditions (Kuznets 1930). The focus on structural transformation and industrial
upgrading (Rostow 1960) and cross-country catch-up (Gerschenkron 1962) can be
found in Akamatsu’s work (1935, 1961, and 1962) on Japan, a country that started
from a much lower level of income than the Western European countries. In a
seminal paper in the 1930s, Akamatsu documented what he called the “wild-geese
flying pattern” in economic development and noted that “wild geese fly in orderly
ranks forming an inverse V, just as airplanes fly in formation” (Akamatsu 1962,
p. 11).
The flying geese pattern describes the sequential order of the catch-up process of industrialization of latecomer economies. It focuses on three dimensions
or stages: (i) the intra-industry dimension; (ii) the inter-industry dimension; and
(iii) the international division of labor dimension. The third element in particular
involves the process of relocation of industries across countries, from advanced
to developing countries, during the latter’s process of convergence.2 A prominent
feature of this stage is that exports of consumer goods start declining and capital
goods begin to be exported. In this stage, a group of economies advance together
through emulation and learning-by-doing. The focus of this paper is on the second
and third dimensions of the flying geese model as illustrated in Figure 3 from a
note prepared by the National Graduate Institute for Policy Studies in Tokyo for the
GRIPS Development Forum in 2002.
A weakness in Akamatsu’s model is that it only describes the flying geese
pattern without linking it to a country’s endowment structure and comparative advantage. He did not recognize that the market mechanism is a necessary condition
for a country to follow its comparative advantage successfully. However, he noted
that the accumulation of capital, technological adaptability of people, and government’s protection policy to promote the consumer goods industries matter for the
flying geese pattern (Akamatsu 1962, p. 3).
There is a fundamental difference between the traditional Structuralist views
and the New Structural Economics (NSE) (Lin 2010). NSE contends that the flying
geese model can be used by latecomers to catch up only if they follow the comparative
advantage of their own countries. This is called the comparative advantage following,
or CAF, approach. In other words, with the CAF strategy, latecomers can follow the
lead goose, whose income levels and endowment structure are not too different,
and can tap into their comparative advantage and reduce their risk and cost of
innovation.3 As long as industrialization is CAF, there is no need for government
2
There is an extensive literature on the flying geese pattern, including Kiyoshi Kojima’s seminal work (2000)
and Ozawa 2004, who have contributed to the dissemination of the model outside Japan, and applied it in country-level
analysis. Being a strategic think piece, a full literature review is beyond the scope of this paper.
3
There is an extensive literature on the spatial patterns of production and vertical disintegration of supply
chains (Helleiner 1973, Jones and Kierzkowski 2004, and Kimura 2010). This is consistent with the NSE framework.
A country has certain natural and factor endowments which determine the comparative advantage of the country. In
any stage of its development, the country would naturally attract those products, parts and components, and processes
that utilize the factors that are abundant and less expensive in this country (e.g., labor-intensive parts of a supply chain,
58 ASIAN DEVELOPMENT REVIEW
Figure 3. International Dimensions—Asian Wild-Geese
Flying Pattern
Source: GRIPS (On-line). Available: http://www.grips.ac.jp/module/prsp/FGeese.htm
to adopt protectionist policies as firms are able to withstand market competition.
Rather, the government’s role is limited to facilitating firms’ entry into new industries
where the country has latent comparative advantage by overcoming externalities
and coordination issues inherent in the industrial upgrading and diversification
process.4
A.
The Spread of the Industrial Revolution: Leaders and Latecomers
The Industrial Revolution started in the UK in the 1700s, but for about 50
years, it did not spread to other countries because the British government forbade
such as assembly lines). As the country’s factor endowment upgrades, the components or processes attracted to this
country would upgrade to more capital- or technological–intensive parts of the supply chain (such as manufacturing
of electronic components). Evidence is provided in Section IV as Taiwanese investors upgrade their investment in the
PRC to manufacturing (not assembly) electronic parts and components and to services (see Figure 10 in section IV).
4
An industry is an economy’s latent comparative advantage if, based on the factor costs of production which
are determined by the economy’s endowment structure, the economy could be competitive in this industry. However,
due to high transaction costs (which are determined by infrastructure), logistics, and other business conditions, the
economy may not yet be competitive in the global market in this industry.
LEADING DRAGON PHENOMENON 59
the export of machinery, manufacturing techniques, and skilled workers. Eventually,
in the 19th century, it gradually spread to other countries in Western Europe. The
earliest center of industrial production in continental Europe was Belgium where
production of coal, iron, textile, glass, and armaments flourished. By 1830, French
firms had employed many skilled British workers to help establish the textile industry, and railroad lines began to appear across Western Europe. Germany was a
latecomer in developing industry mainly because no centralized government existed
there.
The first steam locomotive was invented in the UK in 1804, but other European
countries did not start building railroads until the 1830s. Germany, for example,
produced its first locomotive in 1835, but railway construction lagged due to the
lack of an integrated central government. After the 1840s, German coal and iron
production skyrocketed and by the 1850s, construction began on a rail network.
After its political unification in 1871, Germany exceeded the UK in terms of the
length of new railroads, and there was a rapid catch-up process in the production of
pig iron and other industries (Figure 4).
Relative to the UK, industrialization was delayed in the US because the country at that time lacked the basic factor endowments—labor and capital—to invest
in business. When it finally picked up in the 1820s, its growth was explosive. Laborers and capital came from Europe where political revolutions sent immigrants
to the US. The first locomotive emerged in 1826, and the first railroad in 1827.
The length of the railroad surpassed that of the UK in 1850, reaching 9,021 miles,
Figure 4. Spread of the Industrial Revolution—Latecomers Catching Up, 1800–1914
Length of Railroad Lines Open (in kilometers, 1 km = 5/8 mile)
60000
Great Britain
Latecomers
Germany
50000
France
Germany
40000
Belgium
30000
20000
GB
G.Britain,
the leader
Italy
The Netherlands
10000
Spain
0
Sweden
1830 1840 1850 1860 1870 1880 1890 1900
Source: Statistical Appendices, “Fontana Economic History of Europe,” Vol. 4, from Modern History Sourcebook
(On-line). Available: http://www.fordham.edu/halsall/mod/indrevtabs1.asp
60 ASIAN DEVELOPMENT REVIEW
and expanded rapidly to the west in 1890 to reach 129,774 miles, longer than
the length of railroads in the entire continental Europe (Depew 1895, p. 111).
Rapid industrialization and structural transformation then followed. In 1800, farmers comprised 85% of the US population, but the proportion declined to 50% in
1860.
Gerschenkron (1962) observed that rapid industrialization could start from
vastly different levels of “economic backwardness.” In fact, “the more backward a
country’s economy, the greater was the part played by special institutional factors
(government agencies, banks) designed to increase the supply of capital to the
nascent industries” (Gerschenkron 1962, p. 354).
Like Akamatsu, a weakness of Gerschenkron’s theory is that he did not stress
that for the latecomer to be competitive, it must identify industries consistent with
its comparative advantage or which are CAF. Industrialization can start from a
low level of economic development, but if the level of development is too low,
industries that are too advanced will be comparative advantage defying (CAD) and
may require heavy subsidies and protection from the state. With government support,
it is possible to set up advanced industries—however, as long as they are CAD, they
will be neither viable nor competitive.
B.
Japan’s Catch-up in the Meiji Period: Learning
by Importing then Exporting
Starting with an income level that was only one-third of that in the West
during the 1850s, Japan achieved rapid catch-up in 50 years to become the first
industrial country in Asia in 1904. After opening up trade in 1854, its government
encouraged learning from western technology and institutions by sending high-level
missions including about half of the ministers to the US and Europe for nearly 2 years
(Shimposha 2000, p. 48). After signing the Ansei Treaty in 1858, Japan lost control of its tariff policy but the government provided facilitation by building Japan’s
modern infrastructure and encouraging learning-by-doing. Telegraph services between Tokyo and Yokohama began in 1870. The first Japanese railroad connecting
Yokohama and Shinbashi was built in 1872, and by 1900, Japan had 3,875 miles
of railroad (Ito 1992). The government also actively introduced foreign technology
by importing modern machines and hiring thousands of foreign experts to instruct
Japanese workers and managers in the late 1800s (Ozawa 2004).
Throughout the Meiji period (1868–1912) Japan’s top exports were raw silk
yarn, tea, and marine products, which were consistent with Japan’s comparative
advantage. As Japan’s cotton industry grew, its imports fell steadily, and in 1890, it
began to export large quantities of cotton, yarn, and cloth to neighboring Asian countries (intra-sector upgrading as in Akamatsu 1962). On the institutional side, a banking system was organized and a central bank was established in 1882 (Ito 1992, p. 21).
LEADING DRAGON PHENOMENON 61
Table 1. Catch-Up in the Prewar and Postwar Era (Per capita GDP,
by 1990 international GK dollars)
Europe Targeted
the UK, Gaps
Were Small
% of
the UK
1870
France
Germany
UK
US
Japan
1,876
1,839
3,190
2,445
737
59
58
100
77
Asian NIEs (4 dragons)
incl. the Republic
of Korea Targeted Japan
in the 1960s–1980s
1960
1970
UK
8,645 10,767
US
11,328 15,030
Japan
3,986 9,714
Rep. of Korea 1,226 2,167
PRC
662
778
India
753
868
Viet Nam
799
735
% of
Japan
100
25
Japan Targeted
Germany during the
Meiji Restoration
1890
1900
2,376
2,428
4,009
3,392
1,012
2,876
2,985
4,492
4,091
1,180
% of
Germany
100
40%
China Targeted
East Asian NIEs
incl. the Republic
of Korea
1980
1990
12,931 16,430
18,577 23,201
13,428 18,789
4,114 8,704
1,061 1,871
938
1,309
757
1,025
% of the
Republic
of Korea
100
23
Japan Targeted
the US after
WWII
1950
1960
% of
the US
5,186
3,881
6,939
9,561
1,921
7,398
7,705
8,645
11,328
3,986
100%
35%
Latecomers Started
to Target PRC
after 2000
2000
2008
% of
PRC
20,353
28,467
20,738
14,375
3,421
1,892
1,809
23,742
31,178
22,816
19,614
6,725
2,975
2,970
100
44
44
GK = Geary-Khamis, PRC = People’s Republic of China, UK = United Kingdom, US = United States.
Note: Highlighted countries are the targeted countries.
Sources: Angus Maddison Database, authors’ calculations.
Historical experiences of the Industrial Revolution offer several insights. First,
countries that are on the technological frontier can play the role of the “lead geese”
as Britain did.5 Latecomers have the economic advantage of “backwardness,” and
under certain conditions, they can catch up quickly and even overtake the lead geese.
Second, capital accumulation was necessary but not sufficient for success. Political
stability, openness to trade, and labor mobility were also important for the country
to acquire new technology and develop new industries. In addition, governments
were required to play a facilitating role, as in the case of Germany, Japan, and the
US. Without the existence of a centralized state in Germany since 1871, there would
have been no railroad or Industrial Revolution.
More importantly, selecting the right target country is critical for catching
up. Some European countries could catch up with Britain relatively quickly because
their stages of development were not too far from the leader (Table 1). According to
5
Britain rather than the United Kingdom is used following the convention of the literature on the Industrial
Revolution.
62 ASIAN DEVELOPMENT REVIEW
the estimate of Maddison (2010), per capita incomes of France, Germany, and the
US were about 60%–75% of Britain in 1870.6 During the Meiji restoration, Japan
targeted the industries of Prussia (later, Germany) and its per capita income was
about 40% of the latter. Thus, it was realistic for Japan to target Germany rather
than Britain or the US which were too far ahead in terms of relative stages of
development. Even though many nation states tried to catch up, Japan succeeded
and became the first industrialized nation from the East because it chose the right
country to target.
C.
Post-WWII Era: The US Showing the Way to Japan and Others
The economies of Western Europe and Japan have enjoyed unprecedented
growth and technological upgrading in the decades since WWII in the so-called
“golden age of capitalism” (1950–1974). During this period, nearly all developing
countries pursued dirigiste capitalism but, except for Japan, the Republic of Korea
and other East Asian tigers, they did not succeed. Why? The NSE contends that
the crux of Japan’s and East Asia’s success was that their development followed
closely their comparative advantage (or was CAF) and their governments played the
facilitator’s role (Lin 2010, Lin and Monga 2011).
Just before WWII, textiles and other light industrial goods accounted for
60%–75% of all Japanese exports and Japan’s textile industry was at its peak (Ito
1992, p. 24). In the 1960s, when its per capita GDP was about 40% of the US and
it had established a strong industrial base, Japan targeted US industries (Table 1).
Japan’s historical labor statistics record that a rising share of labor in Japan’s manufacturing sector coincided with a declining share of labor in the manufacturing
sectors of the US. In the 1960s–1970s, Japan supported its heavy manufacturing
sectors, including machinery and automobiles. In the 1980s–1990s, just as the US
was upgrading its industrial base, Japan expanded its shares in the home appliance,
electronics, and computer markets (Figures 5–6).
Figure 6 shows the employment shares in the US during 1958–2005 for
five subsectors selected from 99 manufacturing industries, ranked from most labor
intensive to most capital intensive. Overall, as the capital–labor ratio increases
over time, industrial and employment structures change dramatically. Specifically,
the share of labor employed in the most labor-intensive sectors such as fabrics
declined monotonically. In sectors such as computer manufacturing, the share of
labor employed first increased and then declined, showing a hump or inverse V-shape.
In industries such as aircraft and automobile manufacturing, which are capitalintensive but subject to labor-saving scale economies, the share of labor showed a
6
Britain’s per capita income in 1830 was 3,190 in 1990 international Geary-Khamis dollars. Those of most
countries in Western Europe were in the range of 1,500–2500 IGK dollars.
LEADING DRAGON PHENOMENON 63
Figure 5. Structural Transformation in Japan—Manufacturing Increase Followed
by Slow Decline as Services Expanded (%)
Services
Agriculture, forestry, and fisheries
Manufacturing
1920
1935
1950
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
100
90
80
70
60
50
40
30
20
10
0
Note: Figures refer to shares of employment by sector.
Source: Authors based on Historical Statistics of Japan (On-line). Available: http://www.stat.go.jp/english/data/
chouki/index.htm
Figure 6. The US as Leader of Transformation—Shares in Total Employment
in Selected Subsectors, 1958–2005
Fabric Mills
Computer and
Manufacturing
0.03
0.02
0.01
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
0
1958
1963
1968
1973
1978
1983
1988
1993
1998
2003
0.015
0.01
0.005
0
Aircra and Automobiles
Other Plasc Products and
Fiber Opcs
0.03
0.02
Aircra mfg
Automobile mfg
0.04
0.03
0.015
0.02
0.01
0.01
0.005
0
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
0
1958
1963
1968
1973
1978
1983
1988
1993
1998
2003
0.025
Note: The subsectors, selected from the 99 industrial sectors, are ranked by their capital–labor ratio. These are the:
(i) labor-intensive sector (industry 313210, broadwoven fabric mills), (ii) mid-level capital/labor intensity (industry 334111, electronic computer manufacturing), (iii) high capital intensity (industry 336411, aircraft &
industry 336111, automobile), and (iv) high technical intensity (industry 326199, other plastic products manufacturing including fiber lens, windshield, and optics). The 1997 6-digit NAICS codes (473 industries) were used.
Source: Ju, Lin, and Wang (2011). Based on NBER-CES manufacturing industry data for 1958–2005.
64 ASIAN DEVELOPMENT REVIEW
slow and declining trend. In the most technology-intensive sectors such as plastics
including fiber optics and lens, the share of employment shows a monotonic increase
indicating that the US still maintains a comparative advantage in these industries.
In general, the manufacturing sectors started to shed labor in the 1970s, while the
services sector created more jobs throughout the period. This process accelerated in
the 1990s.
Why is the employment structure in the US changing so rapidly? First, the
simultaneous improvements in education, financial, and legal institutions as well
as in hard infrastructure has allowed firms to constantly innovate and create new
industries and exhaust the set of production possibilities (Harrison and RodriguezClare 2010). Second, this process has been accelerated by globalization. Because
the US maintained an open trade regime and a liberal investment policy, industrial
transformation that started in the 1970s–1980s exceeded that of other countries
(McMillian et al. 2011). Third, the behavior of multinational corporations has played
an important role. Using firm-level data related to outward FDI from the Ministry
of International Trade and Industry (MITI) of Japan and the US, Lipsey and his
co-authors (Lipsey, Ramstetter, and Blomstrom 2000) found that:
(i) “A Japanese parent’s employment, given the level of its production, tends to be
higher, the greater the production abroad by the firm’s foreign affiliates.” This
is similar to that of Swedish firms but contrasts with that of US firms.
(ii) US firms appear to reduce employment at home by allocating labor-intensive
parts of their production to affiliates in developing countries. “Among US firms,
production in developing countries is associated with lower parent employment
at home, given the level of parent output.” This could be interpreted as US
multinationals being “footloose,” allocating the more labor-intensive parts of
their output to developing countries and keeping the more capital-intensive or
skill-intensive parts in the parent facilities.
Why was economic growth in Japan not sustained after the 1970s? From
the mid-1950s to 1973, Japan for a variety of reasons, was able to sustain rapid
growth for nearly 20 years. In 1973, Japan’s rapid growth started declining for three
reasons: oil crises, the decline in investment, and the slowdown in technological
progress. “Japan finally caught up with the US and the Western European countries
technologically in the mid-1970s . . . (and) since it was harder to develop a country’s
own new technology compared to merely obtaining a license, Japan’s growth rate
then had to fall” (Ito 1992, p. 72). In other words, Japan’s advantage of backwardness
had been exhausted. The Japanese economy was then constrained mainly by the
speed of indigenous innovations on the global technology frontier. Japan had to
relocate some of its production base to the Republic of Korea; Taipei,China; and
LEADING DRAGON PHENOMENON 65
other NIEs due to rising domestic labor costs leading to the loss of its comparative
advantage in the labor-intensive sectors.
D.
The Flying Geese Pattern in East Asia
It has been well documented that several generations of lead geese played
significant roles in the rapid development of the East Asian economies. From 1965
to 1990, Japan emerged as the world’s biggest exporter of manufactured goods,
increasing its share of the world market from about 8% to almost 12%. Japan’s
success was followed by a second generation of economies in the 1970s (Hong Kong,
China; the Republic of Korea; Singapore; and Taipei,China), a third generation in
the 1980s (Indonesia, Malaysia, the Philippines, and Thailand, or ASEAN4), and
a fourth generation in the 1990s (the PRC and Viet Nam) (Gill and Kharas 2007,
p. 81).
What is less well studied, however, is how this flying geese pattern evolved at
the subsector level, how the “jumping” of an industry from one country to another
took place, and how the Republic of Korea ceded its dominance in labor-intensive
subsectors to the third generation of geese—ASEAN4, the PRC, and Viet Nam.
Using UN Comtrade data, we show graphically that:
(i) There is an inverse U-shape in some subsectors where the lead goose loses
comparative advantage to its followers (as in Akamatsu 1962). Since Akamatsu’s
transformation cycle could last for over 100 years, the inverse U-shape emerges
only when simple measures such as shares of exports in the sector are used
to illustrate the pattern. Each specific sector may have several generations of
countries playing the role of lead goose sequentially in different periods as each
country’s endowment structure changes. This is reminiscent of Akamatsu’s
theory on the international dimensions of the flying geese model (Figure 3).
(ii) In textiles, an upstream but labor-intensive industry, five generations emerged
sequentially. Japan ceded to the Republic of Korea in the 1980s, after which the
PRC emerged in the 1990s, though its textile exports are now losing steam as
labor costs are rising and employment shares declining. ASEAN4, particularly
Indonesia and Viet Nam, and countries which can expand market share rapidly
would have a better chance to benefit by following the PRC (Figure 7a).
(iii) In the 1970s, Japan lost its leading position in the apparel and clothing sector
to the Republic of Korea, whose clothing exports show a clear hump shape as
it ceded its leading position to the PRC in 1989. The PRC emerged later than
ASEAN4, but its low wages and efficient industrial clusters in many provinces
enabled it to gain dominance. After many years in the dominant position, the
66 ASIAN DEVELOPMENT REVIEW
Figure 7. Share of Sector Exports in Total Merchandise Exports—Several Generations of
Flying Geese
Figure 7a: Share of Textile Exports, 5 Generations
(Japan, the Republic of Korea, the PRC, Indonesia, and Viet Nam)
0.045
PRC
0.04
Rep. of Korea
0.035
PRC
Hong Kong, China
Indonesia
0.03
Japan
Japan
0.025
Indonesia
Viet Nam
0.02
0.015
Thailand
Rep. of Korea
Singapore
0.01
Malaysia
0
Viet Nam
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2010
2010
0.005
Philippines
Figure 7b: Share of Clothing Exports, 2 Generations
0.35
PRC
Hong Kong, China
0.3
Hong Kong, China
Turkey
0.25
India
0.2
Rep. of Korea
Indonesia
PRC
Japan
Viet Nam
0.15
Thailand
0.1
Turkey
Thailand
0.05
Rep. of Korea
Indonesia
2007
2010
2004
1998
Malaysia
2001
1995
1989
Malaysia
1992
1986
1983
1980
1977
1971
1974
1962
1965
0
1968
Japan
Viet Nam
Figure 7c: Share of Toy Exports, 2 Generations
0.08
Hong Kong, China
Hong Kong, China
0.07
Indonesia
0.06
Japan
0.05
0.04
Thailand
PRC
Rep. of Korea
0.03
Japan
0.02
Singapore
0.01
Malaysia
Note: Figures based on SITC rev 1, 3–4 digits.
Source: UN Comtrade data via WITS.
2010
2010
2004
2001
1995
1998
1992
1989
1986
1983
1977
1980
1974
1968
1971
1965
1962
0
Philippines
PRC
LEADING DRAGON PHENOMENON 67
PRC is now losing its comparative advantage due to rising wages and will
gradually cede its market shares to ASEAN4, Viet Nam, and countries that can
seize the opportunity to rapidly expand exports (Figure 7b).
(iv) In toys, the PRC has recently been losing market share in the European Union
and US markets. Shares of toys in total exports have been declining (Figures 7c).
This is consistent with what other studies have observed, though shares vacated
by the PRC have not yet been taken up by African countries (Maswana 2011).
There are large opportunities for other low-income countries to benefit from
the PRC’s graduation from these labor-intensive industries.
E.
The Republic of Korea—An Example of Successful Industrial Upgrading7
The industrial upgrading of the Republic of Korea since 1962 is often described as a good example of flying geese catch-up.8 The share of manufactures in
GDP rose from merely 9% in 1953 to 30.1% in 1988, while that of the agriculture
and mining sector shrunk to single digits in the 1990s.
During this phase of industrial upgrading guided by export-oriented industrialization, the benefits of economic backwardness were exploited with sequential
structural transformation from labor-intensive industries (i.e., wood manufactures
and clothing) to capital-intensive industries (i.e., machinery and transport equipment). Until the early 1980s, labor-intensive products, primarily wood manufactures
and clothing, had a combined share of about 60% and accounted for the majority
of total exports. Since 1983, capital-intensive machinery and transport equipment
products have accounted for the majority of exports. After the mid-1990s, their share
exceeded half of total exports.
We argue that the Republic of Korea’s success was due in part to its adherence
to its comparative advantage which evolved over time with changes in its factor
endowments, suggesting flying geese catch-up patterns.9 For example, Figure 8a
shows the intra-industrial and inter-industrial dimension of “Flying Geese Catch-up”
patterns. The Republic of Korea successfully moved up the value chain from exports
of clothing to exports of textiles and to production of synthetic fibers (Lim 2011).
In the electronics industry, a comparative advantage recorded by the net trade index
7
The authors thank Kwang Park for this section on the Korean experience.
The Republic of Korea’s industrial upgrading process between the 1960s and the 1980s can be roughly
divided into three phases: (i) the “takeoff” phase (1962–1973), (ii) the Heavy and Chemical Industry (HCI) drive
phase (1973–1979), and (iii) the liberalization phase (1980–later) (World Bank 1987). For details of Korea’s industry
policies, see World Bank (1987), Krueger (1997), Suh (2007), and Lim (2011).
9
Some critics have argued that the Republic of Korea adopted a Comparative Advantage Defying (CAD)
strategy, and there is a heated debate. For the debate on whether the HCI drive in the 1970s is CAF or CAD, see Lin
and Chang (2009). We consider Republic of Korea’s policies as being consistent with the New Structural Economics
and Growth Identification and Facilitation (GIF) framework where government plays a strong role based on market
signals to identify the latent comparative advantages.
8
68 ASIAN DEVELOPMENT REVIEW
Figure 8a. Revealed Comparative Advantage (RCA) of the Republic of Korea’s Industries
16
14
12
8
Electronics
Footwear
6
4
Transport
Clothing
10
Texles
2
0
62
67
72
77
82
87
92
97
02
07
RCA = share of an industry in the economy’s exports/its share in global exports.
Note: Based on SITC rev 1, 2 digits.
Source: UN Comtrade data via WITS, authors’ calculations.
reveals industrial upgrading from simple goods to more sophisticated goods (Lin
and Chang 2009). Starting with the assembly of radios from imported components,
the Republic of Korea obtained a comparative advantage in the home appliance
industry (World Bank 1987). The country started to gain comparative advantage in
electronic parts and components (i.e., transistors and semiconductors) in the mid1980s, and later on in information, communication, and industrial electronics in the
1990s (Figure 8b).
Figure 8b. Trade Specialization Index (TSI) of the Republic of Korea’s Electronics
1.00
0.80
Home Appliance
0.60
0.40
0.20
Comm. and Industrial
Parts and Components
0.00
0.20
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
0.40
0.60
Note: TSI = (export − import)/(export + import) for each industry.
Source: Korea Electronic Association.
LEADING DRAGON PHENOMENON 69
In terms of the inter-industrial dimension, the Republic of Korea maintained
a high revealed comparative advantage (RCA) in clothing exports until the end of
the 1960s, followed by footwear until the 1980s. In the 1990s, it rapidly developed
a high RCA in electronics exports, which was more recently replaced by transport
equipment exports.
The Republic of Korea’s flying geese catch-up also had an international
dimension involving the relocation of an industry from one country to another. For
example, it gained a sharp increase in RCA in footwear in the mid-1960s partly as
a result of manufacturing alliances and technology cooperation between local and
Japanese firms prompted by increasing wages in Japan which had been weakening
the latter’s competitiveness in the sector. A steep decrease in its RCA in the mid1990s indicates that higher wages in the Republic of Korea had led to a relocation
of factories to the PRC, Indonesia, and Viet Nam (The Committee for the 60-year
History of the Korean Economy 2010). Since the end of the 1980s when a liberal
policy was adopted, outward foreign investment from the Republic of Korea’s laborintensive industries has increased with its main destination being Asian countries.10
IV. Successes and Failures: CAD versus CAF
A.
Import Substitution in the 1950s–1970s
In the post-WWII period, most developing countries were keenly aware of the
role that industrialization played in accelerating structural transformation and catchup in Europe, Japan, and the US. Keen to emulate them, developing countries adopted
the prevailing Structuralist paradigm, which advocated an import-substitution-led
(IS-led) industrialization strategy to develop advanced industries similar to those in
the industrial countries. Examples include heavy industries such as iron and steel,
chemicals, machinery, and transport equipment in countries as diverse as Brazil,
Egypt, Ghana, India, and the Republic of Korea.
In spite of a large variety of protectionist measures including high tariffs, even
the most well-intended policy interventions failed in sustaining CAD industries. In
many countries, most tariffs on manufactures led to effective rates of protection
(ERP) well in excess of 100%. In a sample of 10 countries chosen for a special
study, Krueger (1983) found that all except the Ivory Coast and the Republic of Korea
pursued IS-led strategies in the 1960s and 1970s. The average ERP on manufactured
products varied from 356% in Pakistan to 384% in Uruguay.
Governments following CAD were not indifferent to the type of industries
they were protecting. In other words, they also “picked winners.” Brazil is notable
for starting out with high ERPs in the late 1950s but gradually shifting to a strategy
10
See Section IV on FDI.
70 ASIAN DEVELOPMENT REVIEW
where protection for CAF industries was reduced but protection for CAD industries
remained high. Examples are: (i) the plastics industry, where the ERP declined
from 489% to 332%; (ii) textiles, where ERP declined from 298% to 232%; and
(iii) clothing, where ERP changed from 481% to 321% (Fishlow 1983, p. 58a). In
Pakistan, during 1970–1971, the ERPs on most consumer and intermediate goods
were between 100%–200%, except for motor vehicles which had an ERP of 595%
(Guisinger 1978).
The Indian government had an elaborate brand of IS. At the start of the second
5-year plan (1957–1962), policymakers in India envisioned a country that was not
dependent on imports of either consumer or producer goods. This was achieved by
using IS to make machines as well as to make consumer products—i.e., imposing
import licensing requirements and tariffs on capital and consumer goods. As late as
1991, the Indian economy was one of the most heavily protected economies globally
with ERPs averaging 125%, where the highest was 355% (Krueger 2002).
In contrast to Japan and East Asia which followed their comparative advantage, well-intended governments across Africa, Latin America, and South Asia
adopted IS and protection in the 1960s and 1970s to achieve dynamic growth in
industries that were CAD. They assigned a high priority to the development of
capital-intensive heavy industries when in fact capital was scarce. To compensate
for the absence of private firms in capital-intensive sectors, governments leveraged
large state-owned enterprises to produce capital-intensive products. Examples of
such strategies include Indonesia’s launch of a shipbuilding industry in the 1960s
when its GDP per capita was only 10% of its main competitor, the Netherlands, and
the attempt of Zaire (now the Democratic Republic of Congo) to build an automobile
industry in the 1970s when the country’s GDP per capita was only 5% of the US,
then the industry leader (Lin 2011).
The Republic of Korea and Japan, on the other hand, had selected target
countries that were appropriate to their income levels during their catch-up phase.
As reflected in Table 1, Japan targeted Germany whose income was 2.5 times Japan’s
in the Meiji period, while the Republic of Korea targeted Japan whose income was
4 times that of the Republic of Korea’s in the 1970s. Countries flourish because they
have followed their comparative advantages. They fail to catch up if they do not.
B.
The PRC as a Follower: Learning and Industrial Upgrading
The PRC’s success over the past 3 decades is the result of a two-pillar strategy: (i) adopting a dual-track approach to reforms, giving transitory protection to
CAD capital-intensive sectors, and liberalizing entry to CAF labor-intensive sectors,
thereby achieving stability and dynamic transformation simultaneously; and (ii) as a
latecomer, choosing an economic development strategy that tapped into the potential
advantage of backwardness along the lines of the flying geese pattern.
LEADING DRAGON PHENOMENON 71
Figure 9a. PRC’s Rapid Transformation in Export Structure Following
Comparative Advantage
Misc.
Manufactured
Arcles
Machinery
and
Transport
Equipment
2008
2005
2002
1996
1999
Manufactured
Materials
1993
1990
1987
Crude
Fuels and
Minerals
Food and
Animals
1984
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: UN Comtrade; Lin and Wang (2008), updated by the authors.
Industrial development in the PRC after reforms in 1979 has basically followed the country’s comparative advantage or is CAF. The PRC was an exporter
of primary products. In 1984, nearly 50% of the PRC’s exports were crude oil and
agricultural products (Figure 9a). The first industrial upgrade from resources to
labor-intensive products happened in 1986, when exports of textiles and clothing
exceeded crude oil. The second upgrade happened in 1995, when Chinese exports
of machinery and electronics exceeded textiles and clothing. This indicated that the
PRC has started the transition from exporting traditional labor-intensive exports to
nontraditional labor-intensive processes (assembly lines). The third upgrade happened after 2001 following the PRC’s accession to the World Trade Organization,
locking in liberalization of trade in goods and services and making PRC laws and
Figure 9b. . . . . But Slow Transformation of the Employment Structure
Terary sector
Secondary sector
Primary sector
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
100
90
80
70
60
50
40
30
20
10
0
Source: UN Comtrade; Lin and Wang (2008), updated by the authors.
72 ASIAN DEVELOPMENT REVIEW
regulations conform to international standards. Regulatory reforms led to rapidly
rising FDI inflows, bringing in new technologies and processes. As a result, the level
of product sophistication increased.11
The evolution of the PRC’s export structure in the last three decades reflects
significant structural transformation in the flying geese style that has enabled the
country to graduate from being an exporter of labor-intensive products such as
apparel, textiles, and leather to producing more sophisticated items such as home
appliances, office machines, and electric machinery (Figure 9).12 Unlike the case of
the Republic of Korea, FDI played a critical role in the PRC’s industrial upgrading.
The following points about this can be made:
(i) Inward FDI helps industrial upgrading. Many studies have pointed out that foreign investors are quick to identify a country’s comparative advantage and serve
as the most dynamic forces in industrial development and upgrading (Harrison
and Rodrı́guez-Clare 2010; Aghion et al. 2011). In our view, foreign investors
serve as identifiers of growth sectors, providing advanced technology and helping reduce first-mover risks and transaction costs when firms attempt to enter
a new product or market. The PRC’s capital–labor ratio in the manufacturing
sector increased from 0.4 in 1985 to nearly 4.0 in 2007. Foreign-invested enterprises accounted for about 20% of tax revenue, 55% of imports and exports,
and over 80% of high-tech exports (MOFCOM 2011).
(ii) In the last 5 years (2005–2009), FDI inflows have been shifting towards higher
value-added products, parts and components, and subsectors including services,
as shown by Figure 10. Investors from Taipei,China have provided much-needed
technology and managerial skills that firms need in electronics and information
technology. These firms are moving the manufacturing of electronic parts and
components to the PRC. Wholesale and retailing have shown the fastest growth
rate in recent years, as the PRC moved toward promoting domestic consumption.
(iii) The process of three-stage upgrading shows the importance of learning-byexporting from lower-end manufacturing goods to higher-value-added goods
and subsequently to services. Initial learning activities occurred within sectors,
11
There is, however, a myth on the level of export sophistication which was discussed at length in Koopman,
Wang, and Wei (2008) and Lin and Wang (2008). In fact, over 50% of exports in terms of value-added were foreign
value-added—i.e., goods and services produced by foreign-invested enterprises (FIEs). Among high-technology
goods, over 80% were exported by foreign-invested firms.
12
In the context of vertical disintegration of supply chains, the flying geese pattern still exists as multinationals
move the labor-intensive part of their production (often the assembly line) to the PRC and other low-wage countries,
keeping the critical components and parts at home. This does not change the fundamental premise of our paper. As
wages and salaries increase in the PRC, the labor intensive assembly lines will shift to other lower-income countries,
and the PRC will upgrade to higher value added components and parts, as well as higher tech products, as shown in
Figure 10.
LEADING DRAGON PHENOMENON 73
Figure 10. Changing Structure of FDI Flows to the PRC—From Manufacturing to Services
Growth of Approved Outward FDI from Taipei,China to the PRC, 2005–2009 (%)
Fabricated Metal Products Manufacturing
Chemical Material Manufacturing
Electrical Equipment Manufacturing
Basic Metal Manufacturing
Non-metallic Mineral Products…
Machinery and Equipment Manufacturing
Added
ed
Electronic Parts and Components… Highh Valuee Adde
Service
Serv
Se
v
ice
sector
sec
c
tor
Wholesale and Retail Trade
Source: MOEA, Taipei,China; Rosen and Wang (2011), p. 35. Note that the manufacturing (rather than assembly) of
electronic parts and components is not labor intensive; they belong to higher value added class.
then gradually spilled over horizontally to new sectors, and eventually diversified through outward FDI to other countries (Lin and Wang 2008).
C.
Sub-Saharan Africa—Trailing Far Behind
There are several signs of a slow deindustrialization in Africa in the last
decades, when the PRC and India were emerging as large industrial countries and
African countries were undertaking structural reforms and liberalizing and integrating with global markets. An overview of Africa’s industrial performance during
1990–2010 indicates that 40 out of 45 countries had manufacturing value-added
(MVA) per capita of less than $200 and almost half experienced negative growth in
MVA per capita (UNIDO 2011, p. 46).
The report by UNIDO (2011) also shows how the share of labor in the manufacturing sector has declined, suggesting that employment in light manufacturing
industries (e.g., textiles, apparel, and leather products), which are labor intensive, declined after 1990. A large part of the employment losses had been due to a decline in
the share of textiles, from about 7% in 2000 to 5% in 2009 (UNIDO 2011, p. 27). The
fact that Africa is increasingly dependent on other regions for light manufactures is
significant for three reasons. First, the trade deficit indicates that African economies
have a sizeable domestic market for light manufactures. Second, light manufacturing
sectors are a stepping-stone towards more technologically sophisticated manufacturing industries (UNIDO 2011). Third, given the size of global demand for light
manufactures, there is significant potential for African exports of light manufactures
which can facilitate structural transformation into more advanced sectors.
74 ASIAN DEVELOPMENT REVIEW
Figure 11. Labor Productivity and Average Wage Rates
in the PRC’s Manufacturing ($)
$70,000
$5,000
$4,720
$4,500
$60,000
$4,000
$3,500
$3,000
$40,000
$2,500
$30,000
$2,000
Wages in Dollars
PRC's Labor Producvity
$50,000
$1,500
$20,000
$1,000
$10,000
$500
$0
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
$0
PRC's Labor Producvity
Wages in Dollars
Sources: UNIDO; National Bureau of Statistics of China. 2010. China Statistical Yearbook. Beijing.
V. The Emergence of Leading Dragons
A.
The Phenomenon of Relocating Manufacturing Jobs is Not New
The PRC is at a stage where the western countries and Japan had been during
the 1970s and where other Asian economies (Hong Kong, China; the Republic of
Korea; Singapore; and Taipei,China) found themselves in during the 1980s. As
labor-intensive industries matured, wages increased, and firms moved into more
technologically sophisticated industries in accordance with the upgrading of the
underlying endowment structure. In the western countries and the Asian tigers,
as the capital intensity of production in manufacturing increased, there was an
overall contraction in manufacturing jobs and a reallocation of resources towards
the services sectors. For example the share of manufacturing employment in the US
reduced from 17% in the 1980s to 9% in 2004, in Japan from 18% to 12% during
the same period. When labor-intensive industries in the high-wage countries shut
down, their jobs relocated to other lower-wage economies such as the East Asian
tigers.
The PRC’s labor cost is rising rapidly, while the structure of its industries,
exports, and employment is changing. Many Chinese economists argue that the
LEADING DRAGON PHENOMENON 75
country has already absorbed its surplus labor and approached the Lewisian turning
point (Cai et al. 2009a, Huang and Jiang 2010). Recent data indicates that wages in
the PRC’s manufacturing sector grew rapidly, rising from just over $150 per month
in 2005 to around $350 per month in 2010 (Figure 11).13 More precisely, the wage
gap between the PRC and other high middle-income countries is closing, a trend
that will likely continue with certainty over the coming decade.
The PRC’s 12th Five-Year Plan projects that during the period 2011–2015, the
economy will grow at 7% per year on average. It also proposes that real wages will
grow as fast as GDP. Both growth rates are likely to be achieved which implies that
real monthly wages will double from around $350 per month to $700 per month over
the next decade. When combined with continued currency appreciation, the PRC’s
real wages could approach $1,000 per month within a decade or about the level of
some of the higher middle-income countries (e.g., Turkey and Brazil) and $2,000
per month by 2030 or the level of the Republic of Korea and Taipei,China today.
B.
Significant Changes in Employment Patterns and Location
Spillovers from the leading dragon phenomenon spurred by rising Chinese
wages are already helping to relocate its labor-intensive jobs to other lower-wage
countries.14 This is happening in several ways.
(i) The most evident is the ongoing transformation in the PRC’s manufacturing
sector. Following the flying geese pattern of development, the country is transitioning from labor-intensive industries towards more advanced ones, with
machinery becoming increasingly dominant in manufactured exports.14 New
evidence shows that urban manufacturing industries had restructured during
2002–2009. As a result, the largest decline in manufacturing employment is
currently unfolding in textile, chemical fiber, printing and record media, tobacco processing, and nonmetallic mineral product industries (Figure 12).
(ii) The PRC’s restructuring could accelerate. First, with rapid urbanization, expansion of tertiary education, and greater labor market flexibility, young workers
may be unwilling to stay locked in low-skill manufacturing jobs and may begin
to seek upward mobility. Although it will remain a “labor surplus” economy
until 2014, the growing demand for service sector employees will gradually
stretch the Chinese job market (McMillan 2011). Second, with gross domestic
13
From Oxford Analytica, on 28 March 2011. During 2010–2011, the PRC’s minimum wage for 30 municipalities rose by 25% or more.
14
There is a possibility of relocating labor-intensive manufacturing from coastal regions to inland regions,
but the wage rate difference between the two regions is only 30%, and transportation and transaction costs are higher
in inland regions. Multinationals will be the first to relocate to other low-income countries, and Chinese enterprises
will follow. Labor-intensive manufacturing will move to other low-income countries sooner or later, depending on
external and internal factors.
76 ASIAN DEVELOPMENT REVIEW
Figure 12. Sunset Manufacturing Sectors in the PRC—Change in Employment
in 2002–2009 (%)
15.00
10.00
5.00
0.00
–5.00
–10.00
–15.00
–20.00
–25.00
Note: This chart shows only those subsectors where employment is declining or rising more slowly than the average
for the urban manufacturing sector in the PRC.
Source: Banister and Cook 2011 and NBS, China Labor Statistical Yearbook 2010 (for 2009 data).
savings as high as 45% for over 25 years and gross capital formation of over
50%, capital availability has increased substantially, with the channels for exporting this capital largely open. The government encourages enterprises in
labor-intensive sectors to go global by providing guidance and incentives including, but not limited to, setting up 19 industrial zones outside the PRC.
(iii) Evidently, rising wages in labor-intensive industries have already triggered relocation of low wage jobs overseas. Many lower-wage countries in the PRC’s
neighborhood such as Cambodia, Lao People’s Democratic Republic, and
Viet Nam, and even Bangladesh are emerging as the new growth nodes for garment, footwear, and other labor-intensive industries. The number of jobs each
country can attract depends on the incentives package it offers to investors.
(iv) Perhaps the most critical channel is outward FDI flows from the PRC and other
emerging market economies to manufacturing sectors in lower-wage countries,
as explained in the next section.
C.
Significant Potential for Relocation of Jobs to Low-Wage Countries
Due to the sheer size of the PRC’s labor market, the number of jobs that the
ongoing industrialization will create for low-income countries is potentially huge.
As employment statistics for manufacturing is extremely sparse and tentative, we
cannot provide any estimates of potential job relocation. However, rough calculations
LEADING DRAGON PHENOMENON 77
Table 2. Employment in Manufacturing, Potential Dragons, 2009–2010
Employment in Manufacturing (million)
Population (million)
Outward FDI ($ billion 2010)
Brazil
PRC
India
Indonesia
Total
13.1
192
11.5
85
1,324
68
8.7
1,140
14.6
12.5
277
2.7
119.3
2,934
96.8
Source: ILO, Penn World Tables, UNCTAD (2011).
are informative and sufficient. Currently, the PRC employs about 85 million workers
nationwide in its manufacturing sector. Rising wages will force the PRC to upgrade
to higher value-added and more capital-intensive and technology-intensive sectors
and to relocate jobs in the existing sectors to countries that have a lower wage rate.
India currently employs about 9 million workers and Brazil employs about 13 million
(Table 2). These emerging market countries employ about 120 million workers whose
jobs could be relocated to other developing countries in the coming decades.
It seems reasonable to suggest that the leading dragon phenomenon alone
can create sufficient labor-intensive manufacturing jobs for developing sub-Saharan
African countries to bring them to par with most industrial countries. Even if the
PRC’s manufacturing sector sheds 10% of its total employment in the next few
years, a pool of 8.5 million jobs will be ready to relocate overseas. The number
could almost double employment in manufacturing in African countries in a few
years, jumpstarting its process of industrialization.
D.
Accelerating the Leading Dragon Phenomenon in Sub-Saharan
Africa—The Role of FDI
Asian and African countries are not alone in competing for the millions of
jobs relocating from the PRC. In particular, in sub-Saharan Africa, the scarcity
of local entrepreneurial skills and investment capital are invariably the top two
constraints for a competitive manufacturing sector. Evidently, availability of outward
FDI can enable them to overcome these constraints and take advantage of the leading
dragon phenomenon to finally participate in the global production of labor-intensive
products. Outward FDI from developing and transition economies reached $442
billion in 2011 (UNCTAD 2012). At the helm were the Russian Federation in
2011 and the PRC in 2010, while Brazil, India, Indonesia, and the Republic of
Korea (collectively, BRIICK) followed as the other key sources of FDI (Figure 13).
Roughly 60% of outward FDI from developing countries went into other developing
countries, mostly in the form of greenfield investments that can typically open
the door for South–South relocation of various industries from the PRC and other
emerging economies.
A large share of the PRC’s outward FDI is flowing to Africa, growing from
a few hundred million dollars in 2002 to a cumulative amount of $13 billion by
the end of 2010, accounting for 4% of the total stock of outward FDI (MOFCOM
78 ASIAN DEVELOPMENT REVIEW
Figure 13. Outward FDI from BRIICK Countries, 2000–2011 ($ billions)
70.0
PRC 65.1
60.0
50.0
Russian Federation
67.3
Rep. of Korea
20.4
40.0
30.0
20.0
India 14.8
Brazil–1.0
Indonesia 7.8
10.0
0.0
–10.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Brazil
Indonesia
PRC
Rep. of Korea
India
Russian Federation
Note: Indonesia was added to the BRIICK countries to meet the interest of readers.
Source: UNCTAD, data accessed 27 August 2012.
2011). About 22% of outward FDI from the PRC is presently concentrated in
the manufacturing sectors, second only to mining which accounts for 29%. In 2010,
Chinese firms also increased the number of jobs created overseas by 10% and capital
investment by 2.5%. The PRC ranked eighth in the world according to job creation
overseas (FDI Intelligence 2011). Two recent papers found that the PRC’s outward
FDI has played a significant role in the growth of African countries (Weisbrod
and Whalley 2011, Mlachila and Takebe 2011). India currently invests over 40%
of its outward FDI in manufacturing. In addition to a booming economy, India’s
liberalization reforms during the 1990s also facilitated the global spread of Indian
firms (Athukorala 2009, p. 146). A recent World Bank survey shows that over 64%
of Chinese firms operating in Ethiopia engage in manufacturing, creating 15,910
jobs (World Bank 2012, p. 12).
VI. Summary and Implications
The emergence of large middle-income countries such as Brazil, the PRC, and
India as new growth poles in the world and their dynamic growth and ascent up the
industrial ladder offer an unprecedented opportunity to all lower-income developing
economies, especially in sub-Saharan Africa, to accelerate industrialization and
catch-up. This paper tried to explain why.
In addition, this paper argues that:
(i) Economic development is a process of continuous industrial and technological
upgrading, and modern economic development is accompanied by structural
LEADING DRAGON PHENOMENON 79
transformation. Nearly all countries that industrialized successfully adopted
CAF strategies to tap the latecomer advantage in a flying geese pattern. Successful industrialization in Japan before 1900, the “passing of the torch” from
the US to Japan after WWII, rapid catch-up of East Asian NIEs, the ASEAN4,
and latecomers such as the PRC and Viet Nam have all followed the flying
geese pattern, albeit to varying degrees.
(ii) This paper provides evidence that not only are industries jumping across borders,
but those jumping industries are also upgrading. In the late 1970s and 1980s, the
lead geese for the PRC were the East Asian tigers. As the Republic of Korea and
Taipei,China are upgrading, industries that have relocated to the PRC are now
also ascending to higher-end products. In a fraction of the time it took Japan and
the East Asian tigers, the PRC has been able to replace simple labor-intensive
products with more sophisticated ones. This is enabled by a government that
fosters CAF industries.
(iii) Dynamic growth, high savings, and substantial investments in education have
triggered a rapid upgrading of the PRC’s factor endowments for more technologically advanced industries. This has pushed up wages at an amazing rate since
2002, causing labor-intensive industries to contract. The PRC has an estimated
85–100 million workers in manufacturing, with most of them in labor-intensive
industries or labor-intensive segments of supply chains. As these industries shed
labor, they will create a huge opportunity for lower-wage countries to start laborintensive manufacturing production. This process, which we call the leading
dragon phenomenon, will offer millions of labor-intensive job opportunities
to developing countries. If Brazil, India, Indonesia, and other large middleincome countries maintain their current pace of growth, a similar pattern and
employment space will arise.
(iv) Labor cost is only one of many factors for the flying geese and leading dragon
phenomenon, governments in both leading and following countries have critical roles to play, as indicated in the Growth Identification and Facilitation
Framework (Lin 2011 and 2012b). Low-income countries must compete to
gain access to capital, technology, and capacity development opportunities. If
they have the right policy framework, the industrial upgrading in large emerging market economies, especially in the PRC, would provide them a golden
opportunity for dynamic manufacturing-sector-led growth in the years to come.
In an increasingly globalized world, opportunities for economic transformation abound. The emergence of a multi-polar world is a blessing even for the
most backward economies because it provides them a chance to enter a new age
of rapid industrialization and structural transformation. Clearly, the opportunities
80 ASIAN DEVELOPMENT REVIEW
that lie ahead for labor-abundant economies in Asia and Africa, which are currently exporting mostly minerals, are enormous—provided that they quickly formulate and implement credible economic development strategies consistent with their
comparative advantage. However, the actual benefit for countries and regions
depends very much on the right policy environment, institutions, and implementation capacities. Countries must still compete to gain access to capital, technology,
and capacity development opportunities.
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